Lloyds TSB was tonight on the brink of sealing a dramatic rescue of ailing mortgage giant Halifax Bank of Scotland.
HBOS, whose share price plunged by as much as 70 per cent this week amid funding worries, confirmed it was in "advanced talks" over a merger that would create a £30 billion banking giant with nearly a third of the UK mortgage market.
It is thought the Government may waive competition rules to get the transaction over competition hurdles, and reportedly follows talks between Lloyds TSB chairman Sir Victor Blank and Prime Minister Gordon Brown. The Treasury and the Financial Services Authority have also been involved.
A takeover of HBOS would end uncertainty about the health of the bank, but there were immediate fears about the implications for the 135,000 UK staff employed by both firms - 65,000 by HBOS and the remainder at Lloyds TSB.
Alex Salmond, the First Minister of Scotland - where around 17,000 HBOS jobs are based - attacked the "spivs and speculators" he blamed for targeting the Scottish-based bank. He said any merger between the two should be based on measured discussion, not a "shotgun marriage" driven by speculation.
The potential merger is the latest dramatic episode this week which has already seen the collapse of 158-year-old investment bank Lehman Brothers and the 85 billion US dollar (£47.2bn) bail-out of US insurance giant AIG.
Central banks around the world have pumped tens of billions of pounds into money markets to try and ease nerves. London's leading share index fell nearly 4 per cent on Monday and yesterday, while another 2 per cent was lost today after poor US housing figures and continued worries over the health of investment banks.
The Footsie is now at its lowest point since May 2005.
Lloyds TSB is reportedly willing to pay no more than £2 a share for HBOS, less than a fifth of the stock's value last summer.
That would be bad news for the company's two million smaller shareholders, many of whom picked up their holdings when Halifax demutualised more than a decade ago.
HBOS is the UK's biggest mortgage lender and savings bank, with an estimated 20 per cent share of the mortgage market at the end of last year and 22 million customers.
Lloyds TSB, which does the bulk of its mortgage lending under its Cheltenham & Gloucester brand, is the UK's third biggest lender in terms of outstanding home loans. At the end of June it had 9 per cent of the UK mortgage market.
The company is also the UK's third biggest savings bank, with £65 billion saved through it and Cheltenham & Gloucester, the country's biggest current account provider.
Without any Government intervention, competition chiefs could raise concerns over the enlarged group's dominant market positions.
Lloyds has been actively looking for acquisitions this year. In June, it was reportedly working on plans to buy Germany's Dresdner Bank from insurance giant Allianz.
The group has seen much less impact from the global credit crisis than its UK rivals, posting a £585 million credit crunch hit for the first half of this year compared to £1 billion for HBOS and £2 billion for Barclays.
The HBOS group has about 1,100 branches around the UK - including 320 in Scotland - with its three main UK bases in Edinburgh, Halifax and Bristol.
HBOS is the biggest financial services employer in Yorkshire with more than 14,000 people in the region, and over 3,200 people in the South West.
Also part of the group are phone and online banking firm Intelligent Finance, investment group Clerical Medical and savings and lender bank Birmingham Midshires.
Lloyds TSB has 1,900 branches, around 160 of which are Cheltenham & Gloucester.
Trade union Unite called for urgent talks with HBOS chiefs over the potential job implications of the takeover.
Deputy general secretary Graham Goddard said: "We will not accept any compulsory redundancies as a result of this merger.
"The country is in the grip of a credit crunch and the cost of living is spiralling. Lloyds TSB and HBOS must take a socially responsible approach to this merger and make the wellbeing of their hard-working staff a priority during these difficult times.
"Unite will be meeting with the other unions at HBOS and Lloyds TSB to ensure there is a co-ordinated effort to support the staff in this time of great uncertainty."
Shares in HBOS - which was formed in 2001 from the merger of Halifax and Bank of Scotland - slumped over the past three days on fears over its funding position.
At one point today, before the merger speculation broke, the group's share price was 50 per cent lower at 88p, less than a third of the value first thing on Monday morning.
Analysts have said HBOS needs to refinance more than £100 billion of funding during the coming months, which could be more challenging after the blow to confidence from Lehman's demise.
Inter-bank lending rates increased sharply yesterday and also overnight, making funding more expensive.
There were also suspicions today that HBOS might have been a victim of "short-selling", where investors make money by effectively betting on the price of a company falling.
Yesterday, the group sought to reassure investors over its health, saying it had a strong capital base and the benefit of a deposit base worth £258 billion. Despite similar comments from the FSA, its shares slumped for the third day in a row today.
In a separate move today, the market turmoil forced the Bank of England to extend its funding help to banks for an extra three months.
The Bank said it was extending its Special Liquidity Scheme, which allows banks to strengthen their balance sheets by swapping riskier assets for Treasury bonds, until 30 January.Reuse content